A stage in life comes when home loan starts looking very lucrative. The rule of investing your money is to ‘start saving’ first. In order to save, the first step is to ‘save income tax’. Government of India has allowed citizens to save on income tax. One of the best examples of saving income tax is by availing Home Loans. This option allows us to combine investment and tax saving in one package. It in Indian Government’s initiative to motivate people to buy their own home. Not only it is good for the individual/family who buys a home for themselves but also triggers the whole economy of the country. This way the government plays a bargain, you buy a house and in turn you will be offered income tax benefits by the government of India. In this article we see how home loans will help you save income tax.
According to Indian income tax act of India, an individual can claim income tax deductions on their taxable income on account of home loan under section:
- Section 24(b) of the Income Tax Act, 1961 &
- Section 80(c) of the Income Tax Act, 1961
When we avail a home loan, we are obliged to repay it back to the banks in the form of ‘Equated Monthly Installments (EMI)’. This EMI has two parts; principal and Interest. The amount of interest we pay depends on the outstanding principal. Suppose you took a home loan of Rs 50 lakhs and your outstanding principal (balance loan) as on today is Rs 10 lakhs only, then the interest will be charged on Rs 10 lakhs. Suppose your monthly EMI is Rs 100, then Rs 25 will be your principal in first year and Rs 75 will be the principal.
Sec 24(b) of the Income Tax Act, 1961
The main benefit comes from this section, where the Interest Portion of your ‘Equated Monthly Installments (EMI)’ is directly deducted from your taxable income. Suppose you have availed a home loan of Rs 40 Lakhs for 15 years @ 10.5% interest. Your monthly EMI will be approximately Rs 40,000 per month. Out of this Rs 40,000, in the first year the interest will be Rs 37,000. Over a period of time (year after year) the interest portion reduces. So in our example, in the first year when the interest portion is maximum, total interest paid in a year will be close to Rs 414,159. Out of this Rs 414,159 government of India has allowed a standard deduction of Rs 150,000 from your taxable income. We will see this in a more detailed example later.
Section 80(c) of the Income Tax Act, 1961
Another chunk of savings is also possible under section 80 (c). The principal portion of the ‘Equated Monthly Installments (EMI)’ is used as a standard deduction. But of course there are some conditions applicable here. It is worth noting here that as a salaried individual you must already been doing some tax savings under section 80 (c). Some common savings are like Provident Fund, LIC, EPF etc. The maximum savings cap of Rs 100,000 is applicable on 80 (c).
Let us take an easy example to understand how much you can save from home loan
As on Today suppose your condition of taxes look like this
|Taxable Income||Rs 10,00,000 per year|
|Savings already under section 80 (c)||Rs 80,000 per year|
|Savings already under section 24 (c)||NIL|
|Tax Paid per year||Rs 124,000 (Rs 10,300 /mon)|
Suppose you have applied for home loan of Rs 40 Lakhs for 15 years @ 10.5% interest.
|Monthly EMI||Rs 40,000/ month (approx.)|
|Interest in year (1)||Rs 414,159|
|Interest in year (2)||Rs 401,728|
|Interest in year (3)||Rs 387,527|
|Principal each year||Rs 530,591|
So let us see how your income tax savings will look like in year 1
Interest Paid = Rs 414,159 allowable deduction = Rs 150,000 per year
Principal paid = Rs 530,591 allowable deductions = Rs 100,000 per year (but you are already doing savings worth Rs 80,000, so the tax deduction you will get due to principal portion is only Rs 20,000 per year).
|Taxable Income before home loan||Rs 10,00,000 per year|
|Additional Savings under section 80 (c)||Rs 20,000 per year|
|Savings already under section 24 (c)||Rs 150,000|
|Taxable Income after home loan||Rs 8,30,408|
|Tax Paid per year||Rs 73,122 (Rs 6,094/mon)|
|Tax Paid Earlier||Rs 124,000 (Rs 10,300/mon)|
|Tax Paid After Home Loan||Rs 73,122 (Rs 6,094/mon)|
|Savings||Rs 4209 per month|
Tax Break Offered on Home Loan in 2013
First time home buyers has been given some tax breaks in union budget 2013. It is not a very big tax relief but still there was something for investors. But there was two catch, one, if cost your first home is above Rs 25 lakhs then you will not be eligible for tax break. The other catch was that if your got your home loan approved before 1-April-13 then you will not be eligible for tax break. In case you satisfy these intelligibility then you get the advantage of claiming income tax deduction of Rs 1.0 lakhs (u/s 80EE). This is over and above the benefit for 24b.
The overall benefit of availing home loan for first time home buyers is immense. In case you are living on a rented apartment, then monthly rent you are paying to the owner is is almost going in drain. Believe me and take a courageous step forward, buy your first home. I will suggest for your you and ready to shift home. Though it will cost you extra but you will be saved from paying both EMI and house rent. Remember that the money you are paying in rent is adding no value to you. But in case you buy a house, you can use this rental income to contribute towards buying a shelter for yourself. This contribution is going towards creation of a long term asset. Your first house will also be emotionally very enriching for you, it can motivate you to accumulate many more such assets in future. On top of this, social security you gain from possessing a house gives immense self satisfaction and confidence.